What is a Busted Convertible?

More properly known as a fixed income equivalent, the busted convertible is a security that is now considered to possess a worthless conversion feature. The reason that the busted convertible is considered to have a valueless conversion is that the price of the common stock that would be used in the conversion has fallen drastically, rendering the stock to be of little or no value. Essentially, this set of circumstances creates a situation in which the busted convertible is now traded as a fixed income investment, rather than an investment that has a varied income potential.

Busted convertibles are a situation that many investors wish to avoid at all costs. When the market price for the underlying security falls to a point that the stock is more or less worthless, this means that the investor essentially has two options. The busted convertible can remain in the possession of the investor, who absorbs the total loss. Choosing to hold on to the busted convertible usually takes place is there is some hope on the part of the investor that the market trend will reverse, and the fallen stock price will begin to stabilize and then slowly climb back to a profitable state.

A second option is to simply offer the busted convertible for sale, selling it as if it were a fixed income investment. This often means that the asking price is either equal to the current stock price or perhaps even a little lower. An investor may choose this route if he or she cannot afford to wait for the stock to reverse its downward spiral, or there is no hope that the situation will change in the foreseeable future. Assuming that the investor can find a buyer for the busted convertible, the total loss is partially offset by the sale of the convertible security.

However, in many cases, finding someone willing to purchase the busted convertible as a fixed income investment and at the current market value can be a difficult task. Once broker charges are settled, there may be almost no revenue realized from the transaction that can be applied to the overall lost that resulted from the fall of the stock price.